Publication / Inside EPA
January 3, 2014
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Bankruptcy Ruling Limits Industry Ability To Transfer Cleanup Liabilities

A U.S. bankruptcy court ruling that found Kerr-McGee Corp. liable for billions of dollars in environmental cleanup costs, after it fraudulently conveyed assets to a new parent company to evade its debts, sends a warning to companies to carefully investigate and document environmental liabilities when buying or selling assets, legal experts say.

In the Dec. 12 opinion in Tronox Inc. et al. v. Kerr McGee Corp et al., Judge Allan Gropper for the U.S. Bankruptcy Court for the Southern District of New York found Kerr-McGee Corp. acted with “intent to hinder” when it created the new company Tronox in 2005, and left it with environmental liabilities estimated at up to $14.1 billion with no available assets to pay the obligation — ultimately setting up Tronox to fail. Relevant documents are available on InsideEPA.com. (Doc. ID: 2456650)

The landmark ruling, considered the largest bankruptcy award ever for U.S. environmental claims and liabilities, awarded between $5.1 billion and $14.1 billion to the United States and other claimants to be paid by Anadarko Petroleum Corp. and its subsidiaries. Anadarko purchased Kerr-McGee Corp. in 2006.

Anadarko has vowed to appeal the decision, and sources say the company will likely take its appeals all the way to the Supreme Court, if necessary.

The decision is precedent setting because it “will not let polluters evade their environmental liabilities through a corporate shell game,” U.S. Attorney for the Southern District of New York Preet Bharara said in a Dec. 13 statement.

EPA enforcement chief Cynthia Giles said in a statement that the court ruling asserts that companies are responsible for the toxic pollution they cause and that “those that manipulate their assets and leave American taxpayers to foot the bill to clean up their mess will be held accountable.”

Other experts say the ruling is significant because it shows companies buying or selling assets with existing environmental cleanup liabilities must take steps to ensure their disclosure of liabilities is well documented and that everyone involved in a sale is acting in their own company’s best interests.

“I think this is a unique case in terms of the facts but the takeaway message is that it does show that what’s contained in the public disclosure statements is not reflective of the actual environmental liability that a company may have and you have to do more due diligence when you are buying companies that have historic operations,” says one environmental lawyer.

But the source cautions it still will be hard for other companies to prove similar cases of fraud. “These are unique facts, and it’s a very high threshold to find fraud. Another court could infer from those bouts of fraud that there wasn’t discontent. In fact a lot of [the ruling] came down to the credibility of the experts, the court did not find the experts of Kerr-McGee convincing . . .they found [those experts’] opinions not persuasive from other courts,” he says.

A majority of the money from Anadarko will be used to clean up contaminated sites around the nation affected by “Old Kerr-McGee” businesses that included uranium mining, the processing of radioactive thorium and the manufacturing of perchlorate. In a statement released by Tronox Dec. 12, the company said it will not receive any immediate compensation from the ruling. Instead “88 percent of the judgment will go to trusts and other governmental entities to remediate polluted sites. The remaining 12 percent of any funds ultimately received will be distributed to a tort trust to compensate individuals injured as a result of Kerr-McGee’s environmental failures.”

It may still be years before claimants see payout from the ruling as Anadarko has vowed to appeal the judgment, and has questioned the court’s authority to enter a judgment. Separate litigation over the size of damages is also still underway and likely won’t conclude before the summer.

“Given the significant factual evidence supporting our position, we vehemently disagree with the Judge’s Memorandum of Opinion, and we fully expect to pursue every avenue available to us through the appellate process to protect the interests of our stakeholders, once a final judgment including damages has been rendered,” Al Walker, chairman, president and CEO of the company, said in a Dec. 12 statement.